Can a new financial mechanism put an end to dangerous shipbreaking?

Shipbreaking is a lucrative industry and one that is almost solely carried out in countries like Bangladesh and India, where cheap labour is used to strip ships right on the beach. Although the negative impacts of such practices are well known, current legislation is either too weak to regulate these practices, or not yet enforceable. A new method to put an end to this is on the cards – but will it work?

In August, the European Commission released its latest report on the viability of a financial incentive for sustainable ship recycling, an instrument that if implemented, could shift the balance in favour of cleaner, safer practices approved under European Union (EU) regulation, rather than the vastly more popular option of breaking ships on South Asian beaches, at great risk to workers and the environment.

Although the dangers of “beaching” have been extensively documented, this practice continues unabated and international regulations are yet to clamp down on it.

The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (HKC) isn’t expected to enter into force until 2020 at the earliest. In Europe, the European Ship Recycling Regulation (SRR) entered into force at the end of 2013, but it will start applying in gradual stages only from the date of publication of the European list of ship recycling facilities, which hasn’t yet been completed.

As a result, unsafe and dangerous ship recycling methods dominate the market today, driven purely by profit: it is far cheaper to discard of vessels in this way, rather than opt for EU-vetted facilities. A new proposal to tackle this problem hopes to give Europe a chance to compete with South Asian shipbreaking yards, and reclaim control of the industry.

Circumventing the law

Major ship recycling nations such as India, Bangladesh and Pakistan do not have the appropriate facilities to safely dismantle these ships, and the work takes place on tidal beaches, leading to leaks of pollutants into the waters, as well as fires, explosions and countless human rights violations. Last year, at least 52 workers lost their lives on shipbreaking beaches in South Asia, according to NGO Shipbreaking Platform’s 2016 report.

Despite these widely known facts, India, China, Bangladesh and Pakistan jointly recycle almost 80% of the world’s vessels.

The EU is the single largest market sending end-of-life ships for dirty and dangerous shipbreaking. Germany and Greece were the worst offenders last year: 98% of all obsolete German ships ended up on a beach, and close to 40% were broken in Bangladesh, where conditions are known to be the worst in the world. Greece was responsible for the highest absolute number of ships sold to South Asian shipbreaking yards in 2016, with 104 vessels in total.

This isn’t the only option. Green, safe recycling alternatives do exist – the only issue is cost.

“The cost of sending an end-of-life vessel to be scrapped in a sustainable facility is approximately 34% higher.”

Although reliable public data is scarce, analysis by DNV GL found that the cost of sending an end-of-life vessel to be scrapped in a sustainable facility is approximately 34% higher – or an extra €17 per lightweight tonnage – compared to selling it to cash buyers in Asian countries.

Even owners of EU-flagged ships, which under the SRR have a duty to properly discard of their vessels, circumvent this by re-flagging their ships shortly before scrapping to a flag of convenience, such as Palau, Comoros, and St Kitts and Nevis. These flags are often blacklisted under the Paris Memorandum of Understanding, which aims to eliminate the operation of sub-standard ships, as well as other international treaties. The percentage of EU flags drops to less than 8% at end-of-life, the NGO Shipbreaking Platform found.

“The loophole is linked to the freedom within the shipping industry to choose any flag for the vessel that the owner deems necessary,” says Ingvild Jenssen, founder and director of the NGO Shipbreaking Platform.

“We have strongly argued that it’s very likely that shipowners or the vessels that will be sold for scrap will be sailing under a non-EU flag. [Vessels] are sold via the use of cash buyers, who are basically scrap dealers in end-of-life vessels. They buy the ships from the shipowners with cash, and then they sell them on to the breakers in South Asia.”

Can a new financial mechanism take back control?

The new proposal focuses on setting up a new financial instrument, which would act as an incentive to shipowners.

Essentially, they would purchase a Ship Recycling Licence (SRL) and upon each entry to an EU port, a fee would be levied on each ship. The value of the fee would be equivalent to the monetary difference between sound and unsound ship recycling practices.

The money collected would then be channelled into a dedicated EU recycling fund, which would pay back that fee to shipowners when they opt to recycle their vessels according to regulation.

According to a 2016 study by DNV GL, EcoSys and Erasmus University Rotterdam, this mechanism would collect funds of about €150m per year over the first 15 years, contributing to the building up of a fund of €2.8bn. Its impacts on the ship recycling market would start to be observed after approximately 20 years from introduction, the research found.

Transport NGOs, trade unions and the European Sea Ports Organisation (ESPO) have released statements fully supporting this proposal.

“We argue that without a financial incentive, or an incentive that is not based on flag state jurisdiction, the EU ship recycling regulation will effectively be toothless,” Jenssen says. “If you look at any other waste management issue, such as appliances and electronics, there’s always a financial incentive, or a return scheme linked to the proper management of this waste. And ships shouldn’t be different in that sense.”

The European Economic and Social Committee called it a “progressive, enforceable financial mechanism” and called on the European Commission to establish the method.

A bitter pill for shipowners

Meanwhile, the European Community of Shipowners’ Associations (ECSA), the Asian Shipowners’ Association (ASA) and the International Chamber of Shipping (ICS) argued that this “primary fiscal measure” is incompatible with the UN Law of the Sea Convention (UNCLOS), as well as with World Trade Organisation rules.

“We see great challenges and many loose ends to the practical transposition of the licensing idea,” said Danish Shipping director of EU affairs Casper Andersen, who came out against the financial instrument. “We can only envisage that third-country shipowners, with support from their flag-state, will reject paying into the licence scheme, which will be tremendously distortive to the competitiveness of Danish shipowners, who make a third of all their calls to European ports.”

“Third-country shipowners, with support from their flag-state, will reject paying into the licence scheme.”

In its latest review of the proposal, published in August this year, the European Commission “acknowledges the merits of a potential Ship Recycling Licence, which represents the most promising option investigated thus far.” However, the Commission is keen to wait and see whether the full European list of ship recycling facilities will influence behaviour once it fully comes into effect. It is currently delayed by ongoing site inspections at non-EU facilities that have applied.

At present, there is no clear indication from the Commission on how long until the European is published in full, or for how long its effects on the ship-breaking market would be analysed before the financial instrument comes back into the spotlight as an alternative.

But pressure to redress the balance in favour of sustainable ship recycling is mounting, as reports of irreversible environmental damage, slave labour and workers’ deaths continue to pour in from concerned watchdogs around the world.